Russia's economy under unprecedented sanctions is better than you think

An article for the British magazine The Economist dealt with the situation of the Russian economy in light of what he described as unprecedented Western sanctions in response to Russia's war in Ukraine, as America banned the sale of a wide range of goods to Moscow, dozens of major companies withdrew, and a number of countries combined 60 % of the central bank's international reserves.

The plan was to bring about a sharp decline in Russia's economy, and to punish its president, Vladimir Putin, for his aggression.

In the week after the war, the ruble fell by a third against the dollar, and the share prices of many Russian companies collapsed.

The magazine asked: Is the strategy of the West still going according to plan?

She commented that the chaos in the Russian markets appears to have subsided.

Since its low in early March, the ruble has jumped and is now approaching its pre-war level.

The main index of Russian stocks fell by a third, but recovered a large part of its losses.

The government and most companies make bond payments in foreign currencies.

The scramble for banks that saw the withdrawal of nearly 3 trillion rubles ($31 billion) ended as Russians returned a lot of money to their accounts.

A range of policies, some strict, helped stabilize markets.

The Central Bank raised interest rates from 9.5% to 20%, which encouraged people to own Russian assets with interest, and other less traditional policies.

real economy

The government issued a decree requiring exporters to convert 80% of foreign exchange earnings into rubles.

Trading on the Moscow Stock Exchange has become, in the Central Bank's euphemistic term, "negotiated."

Short selling is prohibited, and non-residents cannot withdraw funds until April 1.

The Economist commented that the real economy is in some ways a picture of the financial economy, much healthier than it appears at first glance.

The weekly measure of consumer prices shows that they have risen by more than 5% since the beginning of March alone.

Many foreign companies have pulled out, reducing the supply of goods, while a weak currency and sanctions have increased the cost of imports.

But not everything rises in price.

Vodka (wine) produced largely locally costs a little more than it did before the war.

And the cost of gasoline is about the same.

Although it is early days, there is little evidence of a major blow to economic activity.

According to an estimate using internet search data released by the Organization for Economic Co-operation and Development, Russia's GDP for the week ending March 26 was about 5% higher than the previous year.

Other "real-time" data collected by The Economist, such as electricity consumption and rail freight loading, are still pending.

The spending tracker produced by Sberbank, Russia's largest bank, rose slightly year-on-year.

Part of this reflects people hoarding goods before prices rise, particularly strong spending on household appliances.

But spending on services has fallen only slightly, and is still healthier than it has been during most of the pandemic.

The magazine noted that it still appears that Russia is not skeptical that it will enter a recession this year.

But whether it is as bad as most economists expect depends on 3 factors.

The first is whether ordinary Russians will start worrying about the economy as the war drags on, cutting spending as they did in 2014 when Russia invaded Crimea.

Penalties

And the second factor: whether production will eventually stop because sanctions prevent companies from accessing imports from the West.

The Russian aviation sector appears particularly vulnerable, as does the auto industry.

However, many large companies, started during the Soviet era, are accustomed to operating without imports.

And if any economy could come close to adapting to being cut off from the world, it would be Russia.

The third and most important factor relates to exports of fossil fuels.

Despite the sheer number of sanctions imposed on it, Russia still sells $10 billion worth of oil a month to foreign buyers, equivalent to a quarter of its pre-war exports.

Revenue from the sale of natural gas and other petroleum products continues to flow as well.

This provides a valuable source of foreign currency from which to purchase some consumer goods and spare parts from neutral or friendly countries.

Unless that changes, the Russian economy may stumble for a while.